Shareholder rights win in Bombay High Court

Invesco had argued that the “validity” of an application issued under the Companies Act could only be tested against prescribed numerical and procedural requirements. And not in reference to its object.

Zee countered this by saying that “validity” needs to be looked at, not only for the numerical threshold but also for “matters to consider”. The single judge accepted Zee’s argument.

But the division bench took a different view.

Relying on Section 100 of the Companies Act, the High Court said the board of a company has no power to decide on “any matter” for consideration for which a meeting is requisitioned.

Article 100 allows shareholders holding more than 10% of the capital to request an EGM. He adds that:

  • The request must set out the matters to be considered for which the meeting should be called.

  • The Board must call a meeting once a valid request is made.

  • If the board does not call an EGM base a valid claim, claimants may do so on their own.

The high court noted that the language used in the section helps corporate democracy and protects shareholder rights.

The term “valid requisition” means numerical and procedural compliance and nothing more. Second, no court or tribunal can prevent an EGM from being held, the High Court found.

Explaining its view, the High Court noted that civil courts will grant injunctions at the interim stage and thereafter proceed to analyze the legality or otherwise of the resolutions. Only after this entire process would the injunction be overturned, the bench said. It cannot be allowed, the bench said.

Invesco had argued that the civil courts lacked jurisdiction to hear cases within the jurisdiction of the National Company Law Tribunal, pursuant to section 430 of the Companies Act.

The Single Judge bench had said that the centrally framed NCLT rules provide the list of provisions over which the courts have jurisdiction, and this does not include Article 100, among others.

Disagreeing with the single judge’s rationale, the divisional bench held that there is an absolute prohibition on high courts adjudicating matters within the jurisdiction of the NCLT.

Although Invesco has the right to convene and hold the requisitioned EGM, it is unable to hold such a meeting. Accordingly, they requested the NCLT to do so under Section 98 of the Companies Act. The provision deals with the power of the courts to call meetings of members (other than an annual general meeting) where this is impossible.

Regarding the alleged illegalities of Invesco’s resolution, the court identified three issues:

  • Regulations of the Ministry of Information and Broadcasting.

  • SEBI Registration Rules.

  • Procedure for the appointment and removal of directors and independent directors.

MIB guidelines

The single judge’s bench had upheld Zee’s argument that MIB regulations require prior approval from the ministry before making any changes in the CEO/board of directors.

The Divisional Bench, however, took a contrary view, saying that MIB permission is only required for the appointment, not for the removal/resignation of a director.

Given the nature of Zee’s industry and business, the MIB has seen fit to go through a process of vetting a person, before that person is put on the board of a company. broadcasting, explained the bench.

If Zee’s argument is successful, then even before the company’s general meeting votes on the proposed resolution, he will need to get clearance from the MIB. Unlike after the adoption of this resolution. The latter appears to be a more convenient and practical reading of the guidelines, the court said.

Appointment of independent directors

The single judge’s order had upheld Zee’s argument that SEBI’s listing rules establish a nominating and compensation committee-led process for the appointment and removal of directors, including independent directors.

Invesco argued before the division bench against that finding saying shareholders do not need NRC approval as they have an absolute right to call an EGM.

The divisive bench agreed saying there is no prohibition on a shareholder appointing an independent director.

The divisive bench also considered Section 160 of the Companies Act, which deals with the right of persons other than outgoing directors to stand for directorships.

As Invesco correctly pointed out, the single judge struck out section 160 of the Companies Act, the court said, while adding that the section makes no distinction between an independent or other director. “A simple reading of article 160, a shareholder of a company clearly has the right to propose the appointment of an independent director.”

Further, the court said that if Zee’s arguments are considered, then effectively even a majority shareholder of a listed company cannot suggest/appoint a director without NRC approval. That is not the intent of the law, the court found.

Managerial vacuum

The single judge’s bench had ruled that Zee’s managing director and chief operating officer, Punit Goenka, could not be removed from his post as a director because it would leave a “managerial vacuum”, as he is the only director to full-time board member, which also includes six other independent directors.

This will render the company non-compliant with SEBI regulations, which require the board of a listed entity to have an optimal mix of executive and non-executive directors, Judge Patel had concluded.

The division bench disagreed. The single judge erased the fundamental right of a shareholder to dismiss a director simply because he happens to be the sole executive director and CEO of Zee, the division’s bench pointed out.

On these observations, the division chamber quashed the single judge’s order. However, at Zee’s request, the court further ruled that the single judge’s order would continue for three weeks.

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